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November 13, 2013

El-Erian: 5 Things to Look for in Yellen Testimony

PIMCO leader offers five hypotheses on what could come out of the Fed nominee's confirmation hearing

First is that she is very qualified, he wrote. “Look for the discussion to highlight in particular her solid academic foundation, extensive policy experience, and sound judgment over many years — all of which speak to a smooth and credible leadership transition at a particularly tricky time for the Federal Reserve.”

She is also committed to the current policies coming out of the Fed, and El-Erian wrote that investors should expect “evolution rather than revolution.”

Similarly, she’s likely to maintain the “collegial approach to decision-making” established by Chairman Ben Bernanke. “This is consequential at a time when conditions on the ground will inevitably call for complex judgment calls, and when markets are likely to take badly signs of material differences within the Federal Open Market Committee,” he wrote.

While El-Erian acknowledges that it would be best if lawmakers could agree on policy, he wrote that Yellen “does not consider inaction on the part of other policy-making entities a deal breaker.”

Finally, El-Erian believes Yellen is confident that regulatory efforts aren’t overreaching to the point that they can hinder monetary stimulus.

“If Thursday's hearing does indeed deliver on these five hypotheses, markets can look to a continuation of the Fed's current policy stance for now,” El-Erian wrote. “When the time for taper comes, as it inevitably will, the central bank would partially compensate through more aggressive forward policy guidance. In doing so, it would also specify an additional set of intermediate policy targets.”

Austin Goolsbee, a former advisor to President Barack Obama, is expecting a different kind of fireworks. He spoke at The New York Times Dealbook conference on Tuesday, noting that some Republicans and Tea Party members may object to her confirmation and attempt to stop or delay it, CNN reported.

Furthermore, if the confirmation is delayed and the Fed lacks a chairman by the time it begins scaling back its bond buying program or budget debates ramp up again, it could have a significant impact on consumer confidence. "All of that would add a lot of uncertainty. People would be really nervous over whether the Fed can carry out the taper or any other effective monetary policy."

Ultimately, he called a lack of clear leadership at the Fed a "market-disruptive event."